Geof Mortlock argues New Zealand needs stronger protection for depositors to counter the Reserve Bank’s 'odd approach' to managing a bank failure

Geof Mortlock argues New Zealand needs stronger protection for depositors to counter the Reserve Bank’s 'odd approach' to managing a bank failure

By Geof Mortlock*

New Zealand currently has a strong banking system, with banks that are well capitalised and generally owned by strong parent entities. The strength of the New Zealand banking system owes much to the fact that the four largest banks (holding close to 90% of banking system assets) are owned by strong Australian banks and are overseen by a very competent banking supervision authority in Australia.

Nonetheless, no country is immune from bank failure. New Zealand is no exception. Although it is around 30 years since New Zealand experienced the failure or near-failure of banks (BNZ in 1990 and DFC in 1989), it is only a decade ago that we saw the failure of more than 50 non-bank deposit-takers; a scandalous failure of the New Zealand regulatory system that has only been partially rectified by subsequent reforms. If the global economy experiences a deep and protracted recession, and New Zealand goes with it, there is no guarantee that we will not see a bank failure or two.

In most countries around the world (and all advanced countries except New Zealand), small depositors are protected when a bank fails. That is because most countries have what is called deposit insurance – a scheme under which depositors are fully insulated from loss and guaranteed prompt access to their funds up to a specified amount if their bank fails.

New Zealand is the only advanced OECD country without deposit insurance. If a bank fails in New Zealand, there is no protection available for small depositors.  Even worse, if the Reserve Bank got its way, it would impose losses on depositors through a ‘haircut’ to your deposits to absorb losses that the bank has sustained.  Under the Reserve Bank’s approach, depositors are deliberately forced to absorb losses (after shareholders have first lost everything). In every other advanced country, small depositors are protected from losses through deposit insurance.

This crazy situation is finally under review. Thank heavens it is being led by the Treasury, given that they seem to have a genuinely open mind and mature approach to the issue.  In contrast, the Reserve Bank retains a largely irrational, ideological (almost theological) opposition to any form of depositor protection.  Its head is deep under the sand.

The Reserve Bank’s opposition to deposit insurance is based on their assertion that this would significantly weaken ‘market discipline’ on the banks and thereby reduce their incentives for prudent risk management. This is a nonsense of an argument. Market discipline on banks comes not through small (‘mum and dad’) depositors, but mainly through large (wholesale, corporate and inter-bank) deposits and other funding. These large depositors and bondholders monitor their funds in banks closely. They understand credit ratings and they understand risk. They are the ones who exert discipline on banks, both by demanding a higher price for higher risk and by, ultimately, cutting funding off from a bank if they have serious concerns about its safety. 

In contrast, small depositors – your average Jack and Jill out there – have no realistic way of knowing whether their bank is safe or how it compares in terms of risk to other banks. They can look at bank credit ratings and financial disclosures, but they do not have the knowledge or experience needed to interpret this information.  And if a small depositor did develop a concern over a bank, they would have very little scope to exert influence on the bank through the pricing of deposits, unlike large corporate depositors. Their only option is to withdraw their deposits from the bank. Moreover, small depositors, unlike the large ones, do not generally have sufficient money to spread it across several banks to diversify their risk. They tend to have most of their funds in just one bank.

In the absence of deposit insurance, small depositors are left vulnerable and exposed in a bank failure. Worse than that, the absence of deposit insurance creates a significant risk of depositors running on the banking system at the first hint of trouble. That is one of the reasons other countries have well-established depositor protection systems. The risk of a mass depositor run on banks is made much worse in New Zealand because of the Reserve Bank’s ill-conceived ‘open bank resolution’ policy, given that it involves ‘haircutting’ bank deposits and forcing depositors to take losses.

In the absence of deposit insurance, the Reserve Bank’s ‘open bank resolution’ policy is a recipe for creating panic across the banking system. It creates a risk that the failure of one bank could trigger a run on many other banks (especially in a period of financial system fragility) because depositors and other creditors would not know whether their bank is next for the Reserve Bank’s haircut. In my assessment, the risk of the Reserve Bank’s ‘open bank resolution’ policy creating a mass run on bank deposits is sufficiently high that it would likely force the government to place a blanket guarantee on bank deposits to stop the run and stabilise the banking system. In other words, the Reserve Bank’s policy – ostensibly designed to protect taxpayers by avoiding government guarantees – would very likely create an even worse risk for the taxpayer by making a blanket guarantee all the more likely.

Deposit insurance would significantly reduce this risk. It would protect small depositors by insulating them from any loss on their deposits up to a specified amount and by giving them prompt access to their deposits. This would greatly reduce the risk of depositor runs. It would also strengthen the ability of the government to enable the Reserve Bank to apply some form of ‘bail-in’ of a failing bank by imposing losses on larger deposits and bonds (after shareholders first absorb losses). Deposit insurance would avoid the need for an emergency ad hoc response from the government in a bank failure situation, such as a blanket guarantee. It would provide for a much calmer and more structured approach to resolving failing banks. And at lower taxpayer risk.

What would a sensible deposit insurance structure be for New Zealand? I think it would have the following features:

  • The deposit insurance scheme would be established by legislation, setting out the objectives of the scheme – essentially to provide protection to depositors in a bank failure situation up to a defined amount.
  • The scheme would be mandatory for all banks; there would be no scope to opt out.
  • Non-bank deposit-takers (NBDTs) licensed by the Reserve Bank should be brought within the scheme, but on the basis that they become subject to a supervision regime the same as for banks (i.e. no longer being supervised by trustees).
  • The scheme would apply to any depositor of a bank or NBDT, regardless of whether they are resident or non-resident, natural persons or legal entities, but would not apply to inter-bank deposits.
  • The scheme could be applied to deposits in any currency, but subject to a standard NZD maximum cap.  However, the simplest option would be to limit the scheme to just NZD deposits.
  • The scheme would limit the amount of protection to a specified sum set either in statute or regulation, which could be increased over time in line with inflation or the growth in the nominal average value of deposits. The deposit insurance limit should be set at a level that fully protects the vast majority of householders’ deposits so as to minimise the risk of retail depositor runs, but not so high as to protect wholesale depositors (i.e. those who can be expected to protect themselves). Internationally, the deposit insurance limit varies considerably from country to country. The international average is around US$75,000 per depositor per bank. In Australia it is A$250,000 per depositor per bank. In the EU it is €100,000. In the UK it is £85,000. In Canada it is C$100,000.  And in the US it is US$250,000. For New Zealand, I would favour a deposit insurance limit of not less than NZ$50,000 per depositor per bank and not more than NZ$100,000 per depositor per bank. The latter would be closer to international norms for OECD countries.
  • The scheme would apply the deposit insurance limit on a per person per bank basis. Under this arrangement, a person’s deposit accounts in a bank would be aggregated to a single total balance. If they have a joint account with their partner, half of the joint account deposit balance would be included in that person’s aggregate deposit balance.
  • The deposit insurance scheme would require the scheme administrator to pay the insured deposit amount to the depositor within a specified period following the closure of the failed bank.  Internationally, the standard is to complete this payment within 20 days, but increasingly deposit insurance agencies are moving to complete payments within seven days. 
  • The scheme would sensibly be structured to enable the deposit insurance fund to finance the transfer of eligible deposit balances to another bank (a so-called ‘purchase and assumption’ form of bank resolution), so that the depositor can access their deposits with minimal interruption – i.e. the deposit account in the failed bank simply becomes a deposit account in another bank, with the same terms and conditions. This is how over 90% of bank failures in the United States are handled. Typically, in the US, the failed bank is closed on a Friday. The insured deposit accounts are transferred to another (healthy) bank over the weekend. The depositor can then access their deposits at the new bank on the Monday. No loss. No fuss. No instability.
  • If the Reserve Bank’s ‘open bank resolution’ approach was applied to a failed bank, the ‘haircut’ to deposits and other liabilities would only apply to deposits above the aggregate value covered by the scheme. For example, if the deposit insurance limit is $100,000, then the haircut would apply only to deposit balances (aggregated on a single depositor basis) above $100,000.
  • The scheme would be administered by a government agency.  Rather than establish a new agency solely for the purpose, one option would be for the Reserve Bank to administer it, given that it is the bank supervisory and resolution authority. However, my favoured approach would be to split the supervision and resolution functions from the Reserve Bank to a new Prudential Regulation Authority and for that authority to administer the deposit insurance scheme. I would rather see the creation of a professional supervisory and resolution authority, separate from the Reserve Bank, rather than continue to have the Reserve Bank do the job in what, all too often, is an unprofessional manner. This would also avoid the current excessive concentration of power in the Reserve Bank. And it would avoid the conflicts of interest that exist with the Reserve Bank as supervision authority – e.g. using prudential regulation for monetary policy and macro-financial stability purposes.
  • The deposit insurance scheme would be funded by regular levies on banks and NBDTs. These would be used to build the deposit insurance fund to a level considered sufficient to meet the expected value of payouts over the long term. In the advanced OECD countries, the target size of a deposit insurance fund is generally between around 1% to 2% of insured deposits. A start-up fund would normally be given around seven to 10 years to reach the target size.
  • The bank levies would be based on their holding of insured deposits and calculated as a percentage fee per deposit per annum. Banks would doubtless pass most or all of this cost on to their depositors. And that is fair enough. No insurance scheme is free. If depositors want the benefit of safety, they should be prepared to pay for it. Typically, in most countries with deposit insurance schemes, the levy is small – usually between 0.02% to 0.05% per annum. On this basis, an insured deposit interest rate for one year might fall from around 3.5% currently to maybe 3.45% under a deposit insurance scheme if the bank in question passed on the full deposit insurance levy to the depositor.
  • A risk-based bank levy could be established. This is done in some countries. And sensibly so in my assessment. It means that higher-risk banks and NBDTs (e.g. those with lower capital ratios, higher risk appetites and less diversified portfolios of assets) pay a higher deposit insurance levy than banks and NBDTs of lower risk (e.g. banks with higher capital ratios, strong asset quality, conservative risk appetite, etc). This would help to strengthen discipline on banks and NBDTs and reinforce incentives for sound risk management.
  • The deposit insurance scheme would need to have either the ability to borrow from the government or from the financial markets (with a government guarantee) in situations where it did not have sufficient funds to make payments. It would then repay the full amount of the borrowing (including interest) over time through higher levies on banks and NBDTs. This is a conventional feature of deposit insurance schemes in other countries.
  • Finally, the scheme would be enabled to use its funds to contribute to the funding of alternative forms of bank resolution, subject to it not paying more than it would have done under the lowest-cost form of deposit payout.        

The sooner New Zealand establishes a deposit insurance scheme the better it will be for the millions of New Zealanders currently exposed to the whims of the Reserve Bank’s odd approach to managing a bank failure. And the sooner we will have a financial system in which small depositors can feel that their funds are safe.

*This article was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.


*Geof Mortlock, of Mortlock Consultants Limited, is an international financial consultant who undertakes extensive assignments for the International Monetary Fund, World Bank and other organisations globally, dealing with a wide range of financial sector policy issues. He formerly worked at senior levels in the Australian Prudential Regulation Authority and Reserve Bank of New Zealand.

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Having a heap of cash in the bank is a very wise decision. This will make it easier to pay the rent, especially at the rate rents are going up these days. You should diversify which means putting a bit of money in each of the banks. This means if one bank fails, your other eftpos cards will still work.

If we have an OBR its comforting to know that house prices will have dropped about 50%

Personally I suspect 50% is a "we'll be lucky" number.

I'd say we'd only need a housing price drop of -25-30% (nationwide) for one bank to get into trouble, combined with a similar Australia housing situation. Mortgages are a huge part of their business.

A housing drop alone won't get them in trouble, doesn't matter what the house is worth on paper, so long as the mortgage payments keep rolling in... if people start losing their jobs, thats when the air circulator becomes the manure spreader.

Indeed and unemployment figures released today show an increase of around 10% in the number of unemployed since Q3. 3.9% to 4.3% is quite a sharp turnaround.

Indeed and unemployment figures released today show an increase of around 10% in the number of unemployed since Q3. 3.9% to 4.3% is quite a sharp turnaround.

If house prices dropped by 25-30% it definitely would matter.

It would transmit into the real economy - people would shut their wallets faster than you can say "negative wealth effect"....

No new electronics,
No holidays - even domestic,
No new cars,
No new boats,
No house renos...

NO CREDIT.

Definite job losses.

Already seeing it in Australia - retail footfall in December 2018 was down 12.7% yoy!

The major Australian banks have NZ subsidiaries which are operated as separate entities & there actually is no legal requirement for the Australian parent banks to bail out kiwi bank depositors atvalk should their kiwi subsidiary fail. I would expect them to help however in time of need but when the chips are down they could simply walk away.
Kiwibank is undercapitalized especially compared to other banks operating Would the NZ Government sage
Kiwibank depositors from a “haircut” on their deposits should kiwibank get into trouble ?
All these banks have heavy exposure to the Auckland property market which is a Ponzi
At least that’s how the foreigners speculating in it for years saw it
Get in & get out

What metric are you using to say Kiwibank is relatively undercapitalised? They have larger capital adequacy ratios than all the aussie banks (with the possible exception of Westpac).

If bank customers still have a mortgage then they could run a revolving credit floating mortgage, direct credit wages directly into this, and put all savings into their mortgage account. So they are unlikely to lose their debt repayment.
If nz bank customers have no debt, then open an Australian bank account for savings deposit and inherit the Govt insurance. (interestingly Australian banks are now asking all nz/foreign account holders to declare their country of residence and resident tax number).

Of course, taking on exchange rate risk and the cost of international transfers is definitely the most prudent way to manage savings

Minimal cost and risk. AUD to NZD is pretty stable and movements normally indicated early.
If you have TDs - some spread across NZ banks and, say, 20% in Aus.

ANZ AU 12m TD = 1.30%; ANZ NZ 12m TD = 3.40% ... on say $25,000 that is worth $525, plus fees. It also has operated in a 5c range last 12m, which is stable, but could put capital of $1250 at risk.

So the question is whether the actual loss of interest and the potential loss of capital is worth it to hedge against an unlikely OBR just to take advantage of a deposit scheme in AU?

Never mind tying up your cash in what could be an inflated asset that may well nose-dive in value in the event a stress-test scenario plays out!

Thanks for this. All sounds sensible, NZ$100k per depositor per bank seems like a satisfactory number, although that low would be quite out of step with Australia’s AU$250k. In any case, something needs to be done, especially with a housing bust looming in Australia, and no doubt NZ. All this could soon be tested.

Why $100k when Australia and the US are $250k?

The cost v benefit I presume.

average deposits in AU and US are higher. NZ household savings is very low. So, there is consideration of the cost vs how many 'average' deposits it would cover.

Let's play it out - if $250k is limit and only 1% of depositors have that limit or above, but the other 99% need to pay a higher premium to cover a cap so high, how would it go down? Now, if at $100k you still attain 90% coverage, but the cost is a lot less, then the economics are better.

It could be uncapped of course, but the cost of such a scheme would be immense.

Do not agree with you regarding household savings. We have boomers who have quite large money invested in Banks as they are also the ones that took haircuts previously from finance companies etc. My concern is for all the young ones as well who are trying to save money to buy a house from the pathetic interest rates we have after tax. Neither need to lose their savings while others have heavy debt via credit. Debtors first, not savers and maybe we would have a better and fairer banking system for these groups. 2008 - $1M in a TD would have returned around $78,000 Gross - now a third of that?

https://data.oecd.org/hha/household-savings.htm

NZ household savings is abysmal.

I think you miss my point. My point is the cost of providing insurance for a larger cap would outweigh the value of the protection. If $100k would cover most people with moderate savings, then it's better to have that than to cover $250k if the premium to do so would drive rates down by more than it was worth.

Baby boomers who lost to finance companies have already been bailed out once by tax payers.

That isn't much considering how few banks we have, and how we have lost banks with mergers. I would think 250k to match Oz. minimum.

Well capitalised, just like any ponzi scheme is well capitalised.

Deposits? And depositors? It is time to change the narrative and get the terminology right, otherwise we perpetuate a fraud. As Professor Werner has been vocal about, and you can see Andrewj's good links for that, there is no such thing as a deposit. You are making a loan to the bank. For the purposes of risk assessment for the creditor the terminology needs to be accurate.

David if you wish to retain integrity for this site as a (generally very good) financial new site then there is a place for you to place in making the terms of reference accurate.

Forget the clever speak about a loan to the bank being your bank deposit
A Savings Bank Account should then be classed as fraudulent
A total false statement to obtain your money under false pretences
Now back to our SOTU what will the moron say ?l

Agreed. I appreciate the way Andrewj has been hammering this message home.

Scarfie, while technically you are correct, even the banks call them deposits. The fraud that is being perpetuated , as this article hints at, is by the banks themselves and the RBNZ. The fraud maintains the illusion to the unknowing general public that the money on deposit in the bank still belongs to the depositor. Any enactment of the OBR resulting in a 'haircut' would be an extremely rude shock to the vast majority of the general public as this article specifically states.

More to the point, and something that is not stated here, is that the banks are PRIVATE business's that government rules and regulations, and an institution, is acting to protect at the expense of the general public. That this protection is not extended to all business's should raise questions to start with and if they were asked, it just might cause our regulators and Government to take pause and consider what they are trying, but failing to achieve. That is protect and preserve the economy of the country. Banks are only one part of the economy, but today due to the ignorance, arrogance and malfeasance of our politicians and their appointed officials, they have become so large and critical that the entire house of cards is vulnerable to any one of them getting into trouble. At which the tax payer will be expected to bail them out.

scarfie,

Don't be such a smartass. Yes,technically a deposit is a loan,as in the event of failure,the depositor becomes an unsecured creditor.,However,people including me, will still refer to it as a deposit.I would love to be there when you tell the person behind the counter that you wish to loan the bank some money. "Do you mean that you wish to make a deposit Mr Scarfie? Certainly,not,don't you know anything? I wish to make a loan,though I don't expect thee to be any actual loan documents and so on until they throw you out.

Excellent article Geof, you mention that the Treasury is currently looking in to this. Do you know roughly when they're likely to push through with the 'deposit insurance' for NZ?

Thanks for your comment. I am not sure when the Treasury/RBNZ review of the RBNZ Act will be completed. Deposit insurance is being assessed as an option in the context of that review. However, where it gets to on the matter only time will tell. Ultimately, it will be for the government and Parliament to determine whether deposit insurance is established and, if so, its precise form.

Well if our current Government is truly focused on improving quality of life for it citizens, such as allowing property to be more affordable. Then you would think that they would want us to invest more in saving schemes such as Kiwi saver, rather than squirreling all available capital in to property which seems to be the current investment mode, since they're no safety net with NZ banks.

Interesting concept that it's the government's role to improve its citizen's quality of life. Personally, I think that's my own duty to improve my family's quality of life

Okay. Let's sell off the hospitals, disband the Police. Stop spending ratepayers/taxpayers money on water and wastewater treatment. Cancel Superannuation payments, it's everybody's duty to improve their quality of life and be set up for retirement. Might as well repeal the crimes act making it legal to defraud others so you can further improve your own family's quality of life.

Nzdan,

Well said. People like Yvil would would be the first to scream if the police didn't attend a break-in at their property,or the fire service were slow to get to a fire at their bach,or the local hospital didn't attend quickly to an injury sustained by one of their children.
Of course,they also expect good roads for their big SUVs,street lighting,sewage and water services and so on. Oh,and they they generally want to pay less tax and have 'small' government. The word parasite somehow comes to mind.

Maybe the Hospitals could sell up all their dialysis machines to private investors, removing the burden on the Tax Payer and freeing up some capital for much needed building maintenance. They could then be rented back to the people with kidney failure, or kept hidden away in some storage locker until such time as they can be sold for a profit.

I agree...but NZ voted in a socialist gov to look after them, that's the whole precept of socialism. Doesn't mean the citizens will be taken care of, just a different type of citizen that for whatever reason is not as capable as looking after themselves as other parts of the citizenship.

It's incredible we don't have depositor insurance it leaves us extremely vunerable !
Article is written for you RP I certainly wouldn't have more than 10% of my wealth in the bank.

Shoreman, the existing OBR (which would have a very limited impact on me personally) is superior than the dire conditions that would prevail that would leave many a speculator buried under a portfolio of illiquid assets worth 50% less (hypothetically speaking).

Have you ever stopped to consider the conditions that would warrant implementation of OBR? It's those who lose least that would win most. Cash is king.

RP From my observations people who have their nest egg in cash ( TD's etc ) are very unlikely to use their cash in a depression type scenario to buy cheap assets as they always thing the market will keep falling sound familiar ?
If one has money it needs to live somewhere to provide a cashflow and be inflation proof so is it any wonder Kiwi's like property i.e. $12,000 invested in a reasonable house in Auckland in 1970 is now worth $1.2mil and a whole lot of rent say average $200/week about $500k. What would a TD look like over that time please do the maths.
If we had a 50% depreciaton I would still have my assets ( 7% debt level ) but next to nothing left in a banking collapse if it was in cash.
I think the important point from the above article even with a depositor insurance scheme is it applies to one depositor per bank not per deposit.
Over time I will liquidate some hard assets and turn them into cash too so I can have a spend up rather than leave it all to offspring but it will always be limited to a mil guess thats my personal OBR.

Shoreman, you say -"If we had a 50% depreciation I would still have my assets ( 7% debt level ) but next to nothing left in a banking collapse if it was in cash"

Shoreman, I think you need to do some actual analysis if you think that "next to nothing would be left" if the likes of ASB, Westpac or even ANZ got into difficulties. Can you imagine the state of the economy? Nah, I guess you can't. By the time the said asset returned to its previous glory, you'd long be dead. That runs counter to your assertions you could maximise realization to cash when compared to my term deposits.

Property is very illiquid in such times. There's nothing worse than being overweight in assets others are being forced to offload because their bank tells them to.

Cash is king. There are bargains galore whilst your 7% debt is rising in value.

And $1m invested in Sydney real estate 18 months ago is now worth what?

I think the point RP was making is that all the TD naysayers forget that the same scenario that might see an OBR would also see collapsing asset prices (and probably more likely be brought on by such). Everyone would be in the same boat - but overextended borrowers might find no cash and repossessed assets. TD holders might have a haircut after all shareholder funds exhausted.

If you had 7% debt and the bank called it in, how would it be paid? By selling the assets in a falling market. But who would buy it if the credit markets are frozen? Food for thought.

It seems that evidently you have fundamental belief that property is inflation proof, but that is exactly what causes overvalued assets when it's bought into large scale. Not clear on how house prices which have exceeded inflation by many multiples can in fact be inflation proof.

MisterB, exactly. By spreading one's cash amongst all trading banks is the best measure to minimise loss. Surely not all major trading banks would fail. Under OBR, theyde close on Friday, re-open on Monday. Can you imagine the grim state of play if they did all fail like Shoreman is implying? In the real world, his 7% debt is soaring in value while the securing asset value is collapsing.

Besides, RBNZ is thinking ahead by requesting banks increase capital. As long as the required levels are in place when and if a crisis occurs, this would minimise any depositor losses.

Retired Poppy,

As Geoff says above - if there is no bank depositor insurance and if there is a run on one bank by depositors, then this will cause panic by depositors on other banks and they can rush to withdrawal their money from other banks. When banks face a liquidity crisis, only the RBNZ can provide liquidity given adequate collateral (the lender of last resort). At some point if there is a solvency issue, the government may need to act to provide confidence to the financial system. Recall what happened in NZ with the finance companies and they were unable to access liquidity.

In 2008 / 2009 when large NZ banks were unable to access financial markets for funding, the government had to step in and provide guarantees to investors before they were willing to lend to the banks. Even their Australian parent banks had difficulty accessing funding, so if the Australian parent banks have their own difficulties, the Australian banks may be too busy looking after their own finances to provide liquidity support to their NZ bank subsidiaries.

With the lending books of the big four banks heavily into mortgages (about 60% of loans), and if there is a large fall in property prices, there may be uncertainty about bank solvency ...

CN, under OBR, I can easily see how the troubles of one bank can spread to another. I can also see that RBNZ will more than likely introduce a bank funded deposit scheme. When and if it hits the fan, we do not want to be branded internationally as the ugly duckling. Outside of this, under a worse case apocalyptic scenario, my losses would be dwarfed by the losses and serious insolvency issues suffered by others.

Those who lose least will come out the other side best dressed.

From what I understand, bank failure is largely about panic, and people taking a run on the banks. There should be systems in place already that would prevent banks failing for any other reason. This is one reason deposit insurance was brought in by Labour about a decade ago, to prevent the risk of a run on the banks during the GFC. Huge mistake IMO to remove it. Banks now are making huge profits, which could go back into providing some form of insurance.It shouldn't be safer to have all your money stored under your bed, than in a bank.

Well, when you deposit with a bank, you give 'your' money to the bank - therefore the bank becomes indebted to you.

If you loan money to a company (buy equities) and the company goes bust, u lose your money .. well, whatever can't be recovered. Why should banks be different?

Not everbody is owed NZD by the banks. Why should tax payers be forced to underwrite bankrupt, privately owned banks?

Deposit insurance sounds like a scheme to prop up zombie lenders. Perhaps the government should become a failed banks' new owner.

At the end of the day banks can create money out of thin air, all they need is a credible borrower and for that borrower to agree to reinvest in that failed institution (Ponzi scheme). Therefore banks don't need to go bankrupt.

Banks are different. They are the backbone of a countries financial stability. If the banks are not stable then the country is not. That is why you get such a miserable return on a TD, because you are meant to be taking a very low risk. Yes still some risk, but what you are basically investing in is the health of your country as term deposits are turned into loans to other members of the community in order to advance and promote productivity.
Every other 1st world country has some form of TD Insurance because they are smarter than NZ when it comes to having a vehicle in place that would stop a bank run in bad times. The gov does not bear the burden of paying that. The people and the bank do with changes in rate returns. It is a very simple way of providing stability and has been a proven way for many, many years in other countries that have had it.
It should be made to NZ law regardless of what offshore entity owns the bank. And if in the short term a gov has to bail out a bank then so what, build in the means of paying the bailout back. It happened in the GFC in the US and the gov was paid back very fast for any bailouts they had to do, with interest.
It is only for the benefit of the nation. If you don't want that then fine.....

But does it also encourage speculation? i.e. why would I leave my money in the bank if I risk losing it? I may as well just use it and leverage with it to buy another house....bricks and mortar....which if confidence drops in the market - make the situation even worse?

Deposit insurance should be capped at no more than $10k, which would cover nearly all transactional accounts. If you deposit with a bank you accept the financial risk that goes with it, you are an unsecured creditor. If you don't have the risk appetite, or financial literacy, then invest in NZ GB's or T Bills. They are the risk free rate and backed by the Crowns ability to print money. NZ is unique in the OECD in that 80%< of our banking system is owned by foreign banks. We need more choices and better financial literacy, the cost of deposit insurance will be paid for by customers anyway.

Not much of an incentive to save if someones entire savings could be wiped out, minus 10k, through no fault of their own. Having money in the bank should be as safe as houses, as interest on bank deposits barely covers inflation, and it is also taxed anyway.

Why should you get the risk premium without the risk? If you don't want the risk, invest in Government Bonds.

What is the commission rate in buying government bonds?
1) in the primary market
2) in the secondary market?

From memory the commissions are about 1% in the secondary market. The secondary market is where large cash balances would have to buy government bonds I think.

It's definitely not 1%, maybe 15bp bid/offer for a $5k parcel. There are also admin and cost issues around having to hold securities at a clearer, but this is part and parcel of investing at the risk free rate.

The other point to note is that if there is a risk of bank failure and depositors taking a haircut, company treasurers will be moving their cash balances out where possible. The large businesses need more than $10,000 in order to meet their monthly costs such as rents, staff payroll, purchases of raw materials, etc.

Also note that corporate treasurers of the largest businesses in NZ with large cash balances should be monitoring the state of NZ banks. Any large company could be silently moving their cash deposits to other banks, government bond market, or even offshore to say Australia (where there is deposit insurance) or to other international cities where the banks are not at risk (say Hong Kong, Singapore for example). This could cause funding issues at the NZ banks as large deposits are leaving their banks. You saw this in Greece where Greek companies were moving their cash balances out of Greek banks to German banks, and as a result the Greek banks needed liquidity to replace the lost deposits (in the event that the Greek banks were unable to get financing, the other alternative for the Greek banks would be to drastically cut lending and curtail credit which would negatively impact the local economy). The Greek banks limited the daily withdrawal of cash from ATM's.

Large companies in NZ with large cash balances, may be small in number yet could represent a large proportion of bank deposits. Some large enterprises that come to mind include as Fonterra, Woolworths, Foodstuffs, Goodman Property Trust, McDonalds, Todd Corporation, Rank Group (Graeme Hart), Auckland Council, Inland Revenue Department, etc. Some are publicly listed, others are not. Some are private businesses, some are government entities, some are non profits, etc. Some might have large cash balances in NZ banks....

Some may be solicitors / real estate agents such as Barfoot and Thompson with amounts held bank accounts in escrow for property transactions.

FYI, the NZ government accounts show that the cash and cash equivalent balance for FY2017 was $18.6bn. Some of this may be in treasury bills, foreign currencies, money markets etc. Who knows which government entity the cash is in and how much is in the NZ banking system as deposits...

Nothing is safe in this fair world of ours. Leveraged up houses, deposited down lending, gold, and oil, pumped and dumped. Taxed and fiddled, Money laundered and Finance Companies fleeced, Sheep fleeced always.
Bank Robbers are everywhere, World Wide. ones and zeros do not a safe haven make. Except when you skim a portion and move it offshore. Aussie maybe, what crooks, we is as safe as our Houses..just like you. 20% deposit..sure mate...we got that covered..?? 3.99% interest Holy Molley...times 14...30 years...sure mate.

The Internet is as safe as Houses, Stocks sold short, as fast as a Computer can blink. Sold high, returns, maybe.?..suspect, i suspect.

Interest is mismanaged, Taxes are blown away on next to nothing, ask a Jones Boy, in fact ask any Politician or Venezuelan or Cancer Sufferer... A lifetime of care ..gone in a flash.

Pension Fund, or Insurance, sure mate,sign here. We will give you 520Dollars back of your hard earned munny...Save for a rainy Day.

Rocky Coastlines, sure thing, what earthquakes, what high tides, what Ice Melting...Wave...byebye. Take a gamble.

Bag snatchers, the list is endless...put it on the card....just a small fee.....What you want another Currency...that will be a small fee too ...just a couple of %.....off a depositors bundle.

Inflation, is only 1 or two %........that figures...we scammed and skimmed it....whose figures are you using...?

Money printed for next to nuffin, cost a lifetimes wages. (Tax paid...of course).

Please send a donation...to Charity....we will pass it on...Oh...they do not have to pay Taxes...What a Church Fund too ...Unbelievable. God forbid.

I could go on..but a lifetimes of Tax Dodgers, Financial Planners and Bankers and Politicians does not an economy make. ...(Safe).

Banks are money creators, all they need is someone to borrow. It's waters down shareholder value but deposits are always safe as banks can just create money.

With the blessing of Orr or ...is it...Mammon....I forget which...in NZ.

Not worth worrying about, if the banks go down its the end of everyone's life as they know it. As has been pointed out here already, you have to try and imagine the set of conditions that would exist before this happened and it wouldn't be pretty in the streets.The government would have to bail them out and if they couldn't we would need a new name like "New Venezuela".

That's being hyperbolic .. 'end of life as we know it' - you sound like a desperate banker.

Give citizens money, not banks. Why throw money at bad stewards (banks).

No he's correct (in a way) and timing is the thing. ie for the bank(s) to go insolvent the economy would have had to have entered a 2nd Great Depression in which case you know a OBR or 5 is coming.

My view is indeed I'll see a 2nd Great depression in my life time and life will indeed be significantly different during and after it, that's the effect that Peak oil will have.

Try holding onto some real cash. Universally popular for transactions in Northland and the East Cape. Remember reading that in the GFC the super rich pulled their money from banks in folding money by the armoured car load before the brown stuff really hit the fan. If theres a run on the bank, by the time your queing at the money machine its way to late

Having a pile of cash in the bank must be a real concern for some. You get next to no return and if the overleveraged bank goes pop you get the haircut. Not safe as houses is it and surely part of the problem.

Govt should force depositer insurance on the Banks. If interest rates rise to cover it ( I mean maintain profit margins) leveraged assets will drop. Win, win, win.

I’m for deposit insurance. They should be able to model the fees such that it pays for itself over some assumed period of time between banking system collapses. Maybe they could give the fees to a NZ super fund account 2 to manage.

But, it seems important to strengthen the banking system to reduce the likelihood of a systemic collapse. This should include the review the reserve bank is doing and DTI ratios. After all, if you make mortgage debt and farm debt more secure a banking crash is significantly less likely. I think the cost of a DTI that drops over time to 5 or 4.5 is likely to be cheaper than raising their capital requirements. After all the impact of DTI is just lower house prices and less debt which is what we want.

Right now my opinion on that is a failure and a big one is imminent. ie < 10 years, ergo you would have to be stupid or a Govn to be the other party.

"That is because most countries have what is called deposit insurance – a scheme under which depositors are fully insulated from loss and guaranteed prompt access to their funds up to a specified amount if their bank fails."

In effect all the polices? are tax payer guaranteed and not privately insured? So the Q is why should the tax payer insure the saved?

There should not be a fee associated with the deposit insurance. It's the bank's problem, so the bank should pay the insurance for this facility. If you're not convinced, think about how the bank insures mortgages against the death of the mortgagor. Most people have never heard of this absurdity, but banks do this as a matter of course. If the mortgagor is in a partnership, or has dependents, then yeah that's when the mortgagor needs to take out their own life and income insurance etc

Back to deposit insurance, why the hell should I pay for crummy insurance that the bank needs to pay to cover their own backsides? The damn banks should pay for it out of their own shareholder profits, that's what.

If the depositor has to pay, then sure their deposit is safe, but their INTEREST rate is now getting a haircut for life.

Are you really silly enough to think that the bank wouldn't pass the cost on to you in some way? Either by lowering the interest they will pay, or as a direct fee, the depositor would be paying somehow.

> Either by lowering the interest they will pay, or as a direct fee, the depositor would be paying somehow.

I just stated that, and that's why I say the bank shareholder's should pay. I'm not saying you're silly Prag, but one of us is silly, and it isn't me.

Ok, you're not silly, just delusional. The bank shareholders won't wear that, you will end up paying one way or another.

Jock Silver,

With TD rates where they are,I don't much fancy a further cut to pay for deposit insurance cover,BUT I would much rather pay it than suffer a significant haircut,in the event of a failure.
The RB harps on about moral hazard,but why has every other country decided that protecting depositors is more important than moral hazard? Geoff Mortlock is quite right when talks about the danger of bank runs,quickly followed by a government cave-in and a blanket deposit guarantee. Look at what happened in the UK after the sudden collapse of Northern Rock.

Prag, and Jock and the above - how about a change in the rules which states that any deposit into a bank accounts remains the property of the depositor and that the bank is liable for them? This effectively embeds what scarfie says above, that the deposit is a loan to the bank that the bank is liable for. It would put the banks in the same position they put people who take loans out from them. It would go some way to levelling the playing feild I would think.

What makes us think the insurer would be solvent in a bad scene ????

"owned by strong Australian banks and are overseen by a very competent banking supervision authority in Australia".....

Are you serious?

You just have to have faith in the banking system, you have no choice really. When I had a big mortgage I was worried about repaying it and now its paid, the house is sold should I still be worried its now all in the bank ? Sometimes you do wonder what its like being a castaway in the Pacific with just the clothes you washed ashore with, you suddenly have much bigger things to worry about.

I couldn't agree more. NZ should join the rest of the world and introduce a Deposit Insurance scheme. The RBs much vaunted(by the RB) Dashboard is,in my view,a farce. Almost nobody outside those who take a serious interest in such matters,knows that it exists and having spent a fair amount of time studying its 100+ metrics,I defy anyone to then put the big 4 banks in order of riskiness. I certainly can't,though the ANZ's significant exposure to derivatives raises a question mark,but I don't have sufficient technical knowledge to pass judgement on them. And this is supposed to help the 'man in the street' make an informed judgement on where to put a deposit. Don't make me laugh.

What would cost more, Deposit Insurance or a change of the rules that states that any deposit into a bank accounts remains the property of the depositor and that the bank is liable for them?